Sourcing Superstars – Alok Aggarwal & Marc Vollenweider, Evalueser…

Q: Tell us how Evalueserve got started: how did you meet and how did you start to do business together?

Alok Aggarwal: I basically came to the US in 1980, did my PhD in computer science in Hopkins in 1984, joined IBMs Research division in 1984 and then was there for 16 years; I started IBM Research Lab in Delhi, and became the director in 1997. This was the time that dotcoms were taking off, so one of the strategies was that we should open a lab in India because we were losing researchers to dotcom start-ups in the US. So I was given the charge to open a lab in India and in 1998 I moved with the family to Delhi; I started the lab in April 1998 and grew it to about 35 PhDs and 35 Masters.

Marc Vollenweider: Im 100% Swiss, graduating as an electrical engineer with the Swiss Federal Institute of Technology in Zurich. Then I joined McKinsey as a greenhorn, as a business analyst; I spent a year at McKinsey – this was 1990 – then in 1991 went to INSEAD in Paris for my MBA. Then I rejoined McKinsey and stayed in Switzerland and got elected partner in 1998. Then in 1999 I moved to India with McKinsey as one of the partners in the consulting practice, where I was responsible for the healthcare practice and lots of other stuff. And then I also got the responsibility for the so-called McKinsey knowledge centre, which at the time was an initiative led and pioneered by Rajat Gupta, the then global head of McKinsey.

The goal there was essentially to come up with a research center that would sustain the consultants around the world with high-quality quick research. So say you had a question – how many companies were there with these and these criteria – youd send an email to India and some busy bee worked on it and sent back the answer in a ZIP file and then in the morning youd come back to the office and you have the answer ready for you. We started out from an initial team of 12 and ramped this up to 120 MBAs between the years 1999 and 2000. And this was a pure captive, only catering to McKinsey internally. And then it became clear to me that this could be an interesting third-party business form, so thats why in March/April in 2000 I started thinking about setting up my own company.

AA: We met, interestingly, because of a birthday party for the kids, who were going to the American Embassy School in Delhi. This was, I think, early May 2000. When we started talking we realised that he was thinking about one aspect of research and analytics and I was thinking about another aspect; so, why dont we create a company that provides all kinds of research and analytics sets and other high-end sets related to having knowledge skill? So we both met several times during that period – July/August 2000 – and quit McKinsey and IBM in November 2000 and started Evalueserve (which stands for evaluation sets) in December 2000.

Q: When you set up by yourselves was there any McKinsey money involved?

MV: No, there was a clean cut. Alok and I put in the money, our own money, and there is no institutional money from McKinsey. Were privately held, and we keep up the great majority, and then we have a Swiss private equity investor, you could call him a super angel… So during the initial years 2001, 2002, 2003 we needed some money to grow because we turned profitable in 2002, which is truly pretty good, but nevertheless if you then grow at a rate of 100% the single biggest capital consumption item is truly not office space or computers: it is accounts receivables. Because you essentially prefinance your revenue; because the cost of people on your balance sheet, theyre there but you dont get the revenue. So you need to balance that and then you grow at 100% and you need some money, already though youre profitable. So we picked up some money in very small slices and we had five mini-rounds – maybe already micro-rounds, you know, $100,000 here, $100,000 there – over the time of the next five years. We havent taken up any money since 2005.

AA: Seven and a half years later, we are about 2,500 people worldwide. Out of these 2,500, about 60 of us are client engagement managers; so we do business development, we do sales, and with the right hand we keep up our clients and with the left hand we keep up our professionals in our back-end research centres. Because we are very involved in client delivery and client management, all 60 work out of home offices; we have about 28 in the US, two in Toronto in Canada, about 25 in Europe of which 11 or 12 are in the UK, with the UK being our second-largest territory from a sales perspective. Then we have one in Shanghai, one in Hong Kong, one in Singapore, one in Australia, and one in India. So thats approximately our team of about 60 people.

Our back-end offices, which are really bricks-and-mortar offices, are in China, Romania, India, and Chile – so instead of BRIC we call them CRIC-and-mortar… India was the first one that we opened in December 2000; we currently have about 2,130 people in India. China was the second one, with 160; we provide sets in Japanese, Chinese and Korean languages and related knowledge sets out of there in these three languages. In Chile, we are based in Valparaiso, about 45 minutes from Santiago; we provide sets in Spanish and Portuguese from there, and we cover the Latin American market in addition as the Hispanic market in the US, which has been growing quite rapidly – its about 10% of US GDP right now and is expected to double in the next 20 years. This helps us not just in covering these languages and various countries and cultures and customs; this also helps us in providing 24/6 average because instead of people working during night-time in India or China, were able to move – in a smooth manner – work to Chile.

Romania is particularly interesting for us because the place where we are, Cluj, is a university town with quite a few people who speak German very well – so we will be able to cover Germany, Austria and Switzerland quite well. Also we can cover Eastern Europe, in particular Russia, Ukraine, Azerbaijan and so on, Romania itself, Poland, Hungary; that area is growing quite rapidly with the oil outflow from Russia and some of the other eastern states, and hence expected to do very well. So with that we are basically providing knowledge sets, most of them are research and analytics, some of them are middle-office work, but all are knowledge sets for edges, pharmaceutical companies, healthcare, technology, media, telecom, and so on.

Q: What do you think have been the biggest challenges youve come across during the life of the business, and how have you managed to get past them?

MV: I think its fairly straightforward. These 2,500 guys need to be busy. Marketing and sales, thats the single biggest challenge, always; initially – we call it the double chasm – initially when we went to meet people we went in and said hi this is Evalueserve, and they said oh, so you want me to outsource my strategic research? And this was chasm number one, because nobody had done this before: it was a completely new concept; nobody had any idea that this could be done. So that was a huge hurdle.

AA: clearly there did not exist this kind of offshore outsourcing kind of work until the 2000, 2001 timeframe. The only company that was doing it was McKinsey Knowledge Centre, with about 120 people when Marc left; American Express was doing some amount of credit card analytics, probably another 100 people; and General Electric out of its captive was doing maybe another 200-250 people doing card analytics. So total number of people at the end of 2000 when we started was only about 500-1,000. This industry has grown to about 75,000 in India alone, if you look at the whole knowledge sets or knowledge course of action outsourcing industry, so there has been a fairly strong growth in a fairly short period of time. And that of course comes with its own challenges, because humans are not like robots; the skill that knowledge sets industry requires and the knowledge course of action outsourcing industry requires is a fairly detailed thorough knowledge and people need to get some sense of it – you learn partly by experience and by doing the projects.

MV: And then the second component was they were saying and you do this from India? and then we have to say: Yeah, it works really well from India. This is really the double chasm. And to conquer this, to set afloat a new concept, that was really the challenge. And then the next challenge was to build a scalable sales force. You know, now we have about 50 salespeople and these are clearly highly expensive people. So we have to find a form that was truly scalable and was economically possible. And that I think was the second really really big challenge.

Q: How do you go about recruiting those specific skill sets?

MV: By now we know what works. So these would be people with, for example, an ex-Reuters background, or an ex-research background where they had to sell research – salespeople in the sets-for-research domain, I would call it. So these are the kind of people that work very well. Then there are maybe slightly more far away or people who have worked in their respective industries, say in marketing departments or so, and have an angle into sales – who want to move into sales. So you can say the shared elements are that there is a sales angle, there is the understanding of how specialized sets work angle, and then there is an industry angle, and if these three elements work together well, then usually we have successful sales people like that: typically between 30-40 years old, and approximately in that space of capability.

Q: What differentiates Evalueserve from the competition?

AA: Four or five things. One of them is our geographical reach at this point in time. We are more of a global organisation, so as I mentioned earlier we can provide sets almost seamlessly 24/6 without having to have people working the night shift or the graveyard shift. The second is that with the very fact that we are 2,500 people, we are able to bring in areas that other people may not be covering, so we have a fairly strong vertical for example in oil, gas and utilities right now, that I would say most of our competitors do not have.

The third is that – I would call it serendipity as I explained earlier how Marc and I got together, its not that we had some great brand vision, its just happened by chance more than anything else – we are about 2 ½ years ahead of the competition. We were the first ones to start this whole KPO sets business, define it and start it as a third party in a very well-defined manner, and fortunately we nevertheless, I believe, have a two-to-three-year advantage over most of our competitors. I average for patent drafting, in intellectual character, we often see some of the comments made by our competitors and we say, yeah, we were making the same sort of comments in 2005-2006. So we know at what level of evolution and what state of evolution these people are in.

MV: Then I think its a portfolio of sets which is very rare in our case; were purely research- and analytics-based, so we dont do any business course of action outsourcing, or IT outsourcing, nothing of that – our 2,500 people are only doing bespoke research and analytics. This is how we differentiate against, say, an Infosys BPO, or a Genpact, who are also trying to have some activity in the KPO space. But we are pure-play. We only do that – clearly with the necessary focus. There are some niche players, and we are broader than such niche players.

And I think our service portfolio being investment research, which is sort of the space of investment edges, hedge funds, that kind of area; business research which is more like what markets do, what players do, what companies do, these kind of questions; market research which is more phone interviews; then data analytics which is more statistical software packages which you use to analyse large data sets; and then finally theres technology examination which is around patent analytics. That is a rare offering, which is highly synergistic in our case, that very few other people have.

Q: What qualifies as KPO? And are there any limits to what can be outsourced?

AA: Its a very interesting thing. When we came up with this information, I think we had a very specific meaning. We very rarely use the information KPO in talks with our clients because to me it has become a information like love: everyone loves everyone else, but what does the information love average?

What happened was, when we were starting there were a lot of call centres and BPO companies who were doing low-end finance and accounting, low-end HR outsourcing, credit-card processing work and so on. In 2001, 2002 – already 2003 – some of the news media and journalists would ask us what we did; we would say were providing research analytics, knowledge analytics sets out of India, and they would always say oh so youre another BPO – is that a fair way of saying it? And we would say thats true, but you know knowledge sets are fundamentally different from just what a BPO is.

Marc and Ashish [Gupta; Evalueserves CCO and India country head] were discussing this in 2003, and they basically said we are truly a KPO because knowledge is part of what we do, and the more we are able to provide knowledge, the more we can charge – while in BPO the charges are fairly well defined because the processes are well defined: the operator or help-desk that is answering calls, they cant really charge much more. But here if you go up the value-chain – if the person has ten years experience in telecom and is able to provide deeper knowledge – already out of India we can charge $75-$80 per hour. In the US the corresponding rates are more like $400 per hour.

So in August or September 2003 one of the journalists from the Economic Times asked Ashish the usual question, and Ashish said truly you know we are a KPO, not a BPO, and he told me about it later. The journalist didnt pick it up completely, he wrote an article about it and he said Evalueserve talks about being a KPO and I truly – being a researcher at heart – started doing research and we ultimately defined what KPO was and how big the market size would be – about $17billion worldwide – outsourcing to low-wage countries like India and the Philippines and China. I gave a talk at Bell Communications in New Jersey in December 2003 and we wrote a paper in April 2004, and fortunately within a year the news media in India took onto the information KPO and it spread like fire.

So the difference between KPO and BPO is fundamentally the following: in BPO the time of action has already been well-defined, like how youre going to answer a particular call, what are the levels of escalation that there would be and so on. In KPO however there is no such course of action. So you go to a patent attorney, for example, and you ask the patent attorney we want to take a portion of your work and do it out of India and hell say are you kidding? Theres no way you can do it. The person who helps me out is sitting next door and we discuss the write-up with each other at the minimum 3 or 4 times a day; this is an art, not a science, and there is no course of action involved.

So the first thing in a typical KPO project is to truly convince the person and take a portion of that art out, and make a course of action of it so it can be moved to India, China, Chile, etc. But because it can never be completely taken out – because indeed there is a portion of it which is art which that patent attorney who is the rock star or the equity research analyst who is the rock star has in their heads – that 15%-20 % nevertheless remains in their heads and it has to come back, and for the project to be completed that 15%-20% nevertheless has to be completed by the person who is really knowledgeable and is in that country or that particular domain to do it. So that x versus hundred minus x as we call it, where x per cent is being done in the US or the UK, and 100 minus x is being done in the Philippines or India or wherever, is what differentiates a BPO from a KPO.

So, first, there is no course of action which can just be thrown over and get it back; secondly, knowledge is an important aspect of it, the higher you go up the knowledge chain the more in fact you can charge for the project, and thirdly some finishing touches – advice, opinion etc – which could be anywhere from 5% all the way to I would say in some situations 40%, would have to be provided by the front-end person.

Q: Wheres most of your research going? Is the direction changing over time – is there more, for example, technological patent-based research now?

MV: Its growing proportionally. When you look at the breakdown we would do about 40 per cent of our work in investment research, for equity examination for example, for investment edges, or for funds; about 25 per cent in the area of business research, which is more like what is this market doing, here is a customized newsletter, here is a company profile, that kind of work; then we would do about 12 per cent market research, and about the same size in intellectual character, and the rest is data analytics and knowledge technology. In terms of client breakdown we have again about 40 per cent in the financial industry; about I would say 20 per cent is specialized sets – consulting firms, research firms, law firms – and the rest is corporate.

Q: And is that changing at the moment?

MV: Not really, no – its pretty consistent truly. Its growing more or less in line. Its truly pretty surprising, its not really changing. We thought that the investment research would suffer a bit because of all this subprime crisis and so on but thats not at all the case; in fact it increases the pressure on these companies to outsource.

Q: So whats going to be the next big sector to hit KPO?

AA: I think pharmaceutical is very inclined to it. The problem that the pharmaceutical area is going by is that the cost of producing the drugs and getting them approved by the FDA of the US, for example, has been rising at an enormous speed. Last year, for example, only 26 drugs were approved, and $39 billion was spent in research, development and approval. At the same time the population in most of the developed countries has been aging, so there has been more and more need for the drugs but there has not been that kind of money that can be spent on it. Whether or not the US moves into a socialized medical system is becoming immaterial as days go by: it basically is already socialized to a great extent with Medicare and Medicaid insurance programs.

So these pharmaceutical drug companies will have to do two things. One, they will have to find other markets to sell to, which will be India, China, other emerging markets, on the one hand – but again there the people dont have that kind of purchasing strength, so they will have to price their drugs lower; and the second is that they will have to somehow figure out ways of reducing the cost of their drugs. First inventing them and then getting approved – so a very, very mature area where KPO would be advantageous for them.

Q: How do you think the drivers behind outsourcing are changing and what are the greatest threats?

MV: OK. Sometimes people say costs are increasing: increasing salaries and what have you. But in our case I have a reasonably simple answer to that. I say in our case we have a very simple strategy: were going to be in the five lowest-cost highest-skilled locations in the world. Which method that by definition I can prove mathematically that I am always going to have a cost advantage. Because, right, youre always going to be in the lowest-cost highest-skill locations. So thats going to be fine, I guess.

But the biggest challenges will be to add value to clients. This is not a threat, its more a challenge, because clients want more value-addition, more thinking, more – especially in our case – insight. They want productivity, they want global reach, they want 24×5… So when you look at how the service level has evolved in the past few years its been amazing. Today I can do things here which have been completely unimaginable already two years ago. So the speed with which things have been developing is increasing, truly. Its not just linear, its already increasing.

The second point is, I think, the war for talent. The demands that people are putting on outsourcing players method that they have to have the capability to aim higher, and develop people, and that method you have to have very very substantial training processes – we for example have an initiative called Care for People, which includes different career track models, work/life balance, and lots of things. Getting this done is critically important. The third thing is leadership. Especially in the new economies you find that there is very little experienced leadership obtainable, so you have to essentially coach people extremely well into leadership locaiongs they would otherwise never be in. We have some people who are about 30 years of age and rule about 120 people. Now when I was that age I led about 15. So I think creating this leadership from within is a major component.

Other than that I dont think there are major challenges because as we usually tend to say, the players in this space should truly collaborate in the sense of growing the market – because the largest part of the market hasnt already been addressed in addition, which is work thats nevertheless being done inside companies – or already not being done! I average the people who work with us best truly use us for growth; they dont use us to cut costs. Very interesting, you know? They come up with new ideas and they use us to get their growth done. And these are the people who really use us very well. Maybe the war for talent thing is probably the biggest threat, because if the companies dont do that well, they will lose out. Thats the thing.

Q: Finally, India dominates the offshore outsourcing market and has done for some time. Do you think that dominance is unassailable in the short-to-medium term, and if not why not?

AA: India has been growing so rapidly, both in terms of outsourcing but equally importantly in the area of domestic industry, which has been growing very rapidly. Both the outsourcing exports industry and the domestic industry have the same need, taking the same or similar kinds of people, and hence the wages are going higher and attrition is quite large. I think already bigger than wage increases the risk is about attrition: what we call job-hopping.

I think one of the biggest challenges – and unfortunately again because these folks are young, they dont truly realise it at this point in time – that India will confront is this cultural shift that seems to be happening among the youngsters, the young people who are graduating, who just change jobs at the drop of a hat – and I would go further, maybe already without the drop of a hat. They say ok this is boring, lets move or or Im getting a 15% raise from the next company, let me get my annual raise from Evalueserve, let me float my begin again around, get another 15% raise from another company.

What they dont realise is that every time they move from one job to another, the last three months theyre not really doing any work for Evalueserve. And the first three months theyre learning the culture and the ways to do work at the other company. And hence six months of their life is wasted, where they havent really learnt much, and since this is all about knowledge, and learning, theyre screwed. They do this job-hopping four or five times and by the time theyre about seven years in the game, theyve wasted about two years in the whole course of action. They basically have thrown themselves completely out of the market.

Because if we later look at their begin again, already if we were to send their begin again to a client saying we wanted to use this person, the likelihood is that the client is going to refuse, saying you cannot use this person for my work, he seems to be changing jobs all the time, I dont know what kind of knowledge he has, what kind of person he is, and that as a whole – and again that is not particularly only to KPO, this is true about the Indian export industry in general, the export sets industry which is IT outsourcing, BPO and KPO exports – is probably the biggest challenge to the Indian sets exports industry.